If you were asked who of the two countries, the United States or Uganda, has the highest rate of entrepreneurial activity? Indeed, you will answer without hesitation; the United States. Yet, according to the Global Entrepreneurship Monitoring (GEM) index, measuring entrepreneurship worldwide, there are more entrepreneurs in Uganda than in the United States (28% in Uganda versus 4% in the US). Is this as far as Uganda is more developed than the United States? Of course not. Hence the importance of taking into account the quality of entrepreneurship, for several reasons.
First, let’s look at the impact of entrepreneurship on growth. If the dominant idea is that entrepreneurship has a positive effect on growth, the fact remains that several field studies have shown that this impact differs according to the level of development.
More specifically, it has been established that the effect is stronger and more positive in advanced countries than in low-income and underdeveloped countries. Does this mean that developing countries must abandon entrepreneurship as a growth strategy? Of course not! In reality, what is revealed in this fieldwork is that the impact of entrepreneurship is differentiated according to its nature.
Indeed, there are two types of entrepreneurship: necessity entrepreneurship and opportunity entrepreneurship. The first means that individuals undertake for lack of job opportunities. In this case, entrepreneurship is instead self-employment survival.
On the other hand, opportunity entrepreneurship stems from a real conviction. It is turned to the seizure of an opportunity perceived by the entrepreneur. However, it turns out that in developing countries it is necessity entrepreneurship that prevails, while developed countries have a higher level of entrepreneurship of opportunity.
Since need-based entrepreneurship involves self-help, low-value, often informal, survival activities, it is not surprising that its impact on the diversification and structure of these economies is small (Rodrik, 2007). Acs and Amoros 2008; Bosma et al., 2008). In the same way, opportunity entrepreneurship is more oriented towards innovation, creativity, transformation, value-added creation, hence its more substantial impact on growth as well as the creation of direct and indirect jobs. While in developing countries, necessity entrepreneurship creates few jobs because it is often self-employment with informal and rudimentary structures.
Retreat from poverty?
Second, the impact of entrepreneurship on poverty is also not uniform. Of course, entrepreneurship can reduce poverty. Nevertheless, according to GEM data, the impact on poverty will depend on the relationship between necessity and opportunity entrepreneurship. If necessity entrepreneurship predominates, the reduction of debt will be less critical than in a country where opportunity entrepreneurship is the most dominant form.
Finally, the quality of entrepreneurship matters because, as Baumol (1990) explained, the problem for the underdeveloped countries is not so much the quantitative supply of entrepreneurship, but rather the allocation (distribution) of this entrepreneurship between different activities. He thus distinguished between productive entrepreneurship (creation of value, innovation, transformation), and unproductive entrepreneurship (rent-seeking, corruption, etc.).
Therefore, the problem is not the absence of the entrepreneurial spirit in Africa, but rather its misallocation or orientation. In other words, underdeveloped countries are so because of the dominance of unproductive entrepreneurship over productive entrepreneurship.
So, instead of using resources to produce a transform, create, innovate, in the majority of our African countries, the same funds are used for corruption, cronyism with politics, rent-seeking (subsidies, protectionism, etc.). Valuable resources are misused to capture the bulk of the pie, even if it means reducing its size instead of enlarging it.
This allocation between productive and unproductive entrepreneurship is the result of individual arbitrations on how to use their resources (time, effort, money, etc.). An arbitration that is conditioned, spurred by institutions in the sense of the rules of the game governing entrepreneurship and investment. Indeed, each jurisdiction (law, regulation, procedure, etc.) involves a calculation, a distribution of costs and benefits, which influences the choice of everyone.
Unproductive entrepreneurship in Africa
Unfortunately, in most African countries, the rules of the game now favor unproductive entrepreneurship. The regulatory and fiscal tax pressure is suffocating, the climate of hostile business, arbitrary public policies and oriented towards the safeguarding of particular interests. This increases the risk and cost of entrepreneurship for the majority of Africans.
On the other hand, those with connections, connections, and connections will be able to lobby lawmakers and policymakers to take advantage of simple rules that allow them to capture rents to the detriment of others. Those who cannot directly influence these rules of the game will use the corruption and deceptive strategies to circumvent them (creation of companies-screens, payment to the black, frauds, etc.).
Once again, punctured resources to pay bribes instead of being used in the production and creation of wealth. As for those who have no connections or money to manipulate or circumvent the rules, they are forced to fall back on the informal to escape the regulatory and tax hell they are subjected to (between 30 to 80% casual in Africa).
All in all, we are left with a large section of African economies dominated by unproductive entrepreneurship in different forms: rent-based entrepreneurship, corruption entrepreneurship, escape entrepreneurship, informal entrepreneurship. It is not surprising then that the impact in terms of wealth creation, jobs is less than what could have been if one had better-oriented entrepreneurship.
Therefore, the real challenge for African economies is not to have the most significant number of entrepreneurs, but the best quality of entrepreneurship possible. Our leaders should then stop reasoning in quantitative terms, to take into account the qualitative aspect. In this sense, the promotion of opportunity entrepreneurship focused on productive activities should be targeted.
An objective that imperatively requires the influence of individual arbitrations in the direction of value creation and productivity. Once again, improving the quality of our political and economic institutions is essential to ensure that our entrepreneurs choose the right path and put our economies on the road to prosperity.
Modified after originally posted on April 8, 2018 @ 9:30 am